Finance of  the Budget

Prof. A D V de S Indraratna

The  second reading of the budget is over. The government has won it by a majority of 100 votes. The final reading is expected in about 3 weeks’ time. There had been a mushrooming of seminars and discussions  on the budget during  the whole of  last week of October. Many of them examined the budget from the view point of how it affected their organizers.  Workers’ unions and the public looked at  it from how it affected their livelihoods.  Hardly a few looked at it from an overall macro point of view. I do not wish to look at the individual proposals and pass  judgement. I will rather look at the budget ( or the entire budget arithmetic ), as a whole, examine it as a fiscal instrument in the mid-term development framework. and indicate any policy implications, as I see them, for consideration of the policy makers and the relevant public officials.  For this purpose,  I shall first rearrange the 2015 budget in  accounting format, as follows (see Table 1)

 In the backdrop of the preceding three budgets, I see  in the 2015 budget several healthy trends :  From 2009 until 2013, revenue as per cent of GDP has been declining; this trend was reversed this year 2014, with its revenue increasing  by 17 per cent to 14.4 of GDP from 13.9 % of GDP in the preceding year. This rising trend was maintained  in the  2015 budget, with  even a further  increased revenue estimate of 14.9 per cent of GDP. 

On the other side,  the recurrent expenditure apparently could  not be cut due to increasing salaries and wages and subsidies and transfer incomes of Rs. 146 billion, some of which, if I may, might have been prompted due to trade union pressure and electoral and political compulsions.   Nevertheless, the budgeted increase in recurrent expenditure has been kept less than the increase in revenue, thereby working out for a current account /revenue surplus of 1.1 per cent of GDP, for the first time in the last few years, (barring 2014 in whose revised estimates a very marginal surplus of Rs. 8 billion is expected) This is certainly an healthy trend, and should not be allowed to be interrupted by going in for  too many supplementary estimates of current expenditure. 

Table 1 – 2015 Budget in Accounting Format

( Rs. Billion)

			Amo    unt	% of GDP		Amount	% of GDP
I	Total Current Revenue		1,654	14.6	Total Current Expenditure	1,525	13.5
					Current Surplus c/d	129	1.1
			1,654	14.6		1,654	14.6
II	Current Surplus b/d		129	1.1	Public Investment	696	6.2
	* Grants		35	0.3
	Unspecified		11	0.1
	Overall Deficit c/d		521	4.6
			696	6.2		696	6.2
III	Financing of Deficit
	Foreign Borrowings       86.9)	453			Overall Deficit  b/d	521	4.6
	Less Repayment          (38.8)	202	251	(48.1)
	Foreign Investment on TBs & T Bonds		40	(7.7)
	Domestic Borrowings
	Bank                        (13.9)	70
	Non- Bank              (30.7)	160	230	(44.1)
			521	(100.		521	4.6

        Note:-  figures within brackets are percentages(%) of the overall deficit                  

        *I have entered the grants in the capital part of the account  since it is not revenue but                    usually  given for project/capital expenditure.          

Be that as it may, I may add a caveat here:  Given  the above  circumstances,  Current expenditure could be cut, if firm positive action were taken to reduce corruption, waste and ostentation, in the public sector, thereby increasing the current surplus further. The Prime Minister himself has suggested one way : cutting down the number of parliamentary sittings. This would no doubt reduce the cost of sitting fees and subsidized meals and refreshments etc and parliamentary overhead costs. There would be  other bigger cost cutting items, which a Parliamentary  Committee itself  is best allowed to sort out. Positive action in this direction would further enhance the current account surplus and correspondingly ease the burden of financing the capital budget.

 Another healthy feature of this budget is that the trend started in 2010, of  bringing down  the budget deficit   yearly,  has been  maintained  by budgeting for an overall deficit of 4.6 per cent of GDP. I have advocated as far back as  2011 ( see my latest book, Policy Issues for Sustained Development for Sri Lanka ) that to make Sri Lanka Wonder of Asia, one of the several targets should be a budget deficit of 3 %  in 2016 or failing which, 2017). The Government should be able to reach this target in 2017, if it  continues with this trend.

Coming to  the capital budget, it is gratifying to note that despite Government’s effort to maintain the  declining trend in the overall deficit, the planned infrastructure investment has not been reduced; on the contrary it has been increased by more than 20 per cent to more than 5 per cent of GDP and along with the increase in education and health of 54 per cent, the total public investment has been planned to increase to 6.2 per cent of GDP from 5.6 % of GDP in the preceding year. In my view, even this is not enough if Sri Lanka wishes to be the wonder of Asia, especially in the education sector. It would be healthier, of course, if any increase in public investment were to be financed with increase in public savings ( see below)  

I have advocated that public investment should be around 7 % by 2017 so that with the recommended  private sector’s increased contribution of around 28 %  of GDP, Sri Lanka will achieve a target of around 35. 0 % of GDP in total gross investment of the country.  However, Sri Lanka  cannot afford this  increased  investment  by increasing foreign debt  further  as I have argued elsewhere(op.cit) . It must come from  greater mobilization of  domestic resources,  and  increased  FDI.

Already we are heavily indebted. In 2013, as I have shown  elsewhere ( see op.cit), our debt burden, as measured by the debt service ratio, was around one fourth of the total export receipts of goods and services.  The estimated interest payment on debt for 2015 is as high as 425 billion,  only second to salaries and wages, and is likely to increase the debt burden further. If on the other hand, had it  been possible to keep it at half of this sum, for instance, it would be possible to bring down Sri Lanka’s overall deficit to less than 3 per cent of GDP, a target expected to be achieved  under the present scenario by around only 2017 or 2018.

In fact, the debt, in particular the heavy foreign debt is the villain of the piece. It is quite evident when we examine the provision made for financing  the overall deficit, as shown in Section III of the above  Budget Account. Other than the Rs. 202 billion to be set apart for repayment of the existing foreign debt, the total foreign debt including the foreign investment in Treasury Bills and Bonds account for 56 per cent of the total overall deficit in 2015.. And  with the Rs. 230 billion domestic borrowing, three fourths (3/4) of the total public investment is to be met by debt, only the other one fourth (1/4) being met by domestic resources. As I have argued else where (op.cit), this sort of scenario would not be sustainable and must cease . Increased public investment must be financed by increased domestic resources, not by increasing foreign debt.  By the time of the 2017 budget, if not able to swap the above position,  at least  half  the public investment will have to be met with increased domestic resources, ie., with the budget deficit around 3.0 per cent of GDP,  by increasing public savings/ increasing the revenue surplus. That will enable the Government to refrain from increasing the borrowing limit as has happened now. This is indeed necessary for sustained growth and development of the country.

  04.11.2014.